Hong Kong developers poised to spend their built-up war chests?

March 1, 2019

HONG KONG -- Hong Kong developers could be tempted to dip into the financial buffers supporting their credit ratings in order to replenish land reserves, according to S&P Global Ratings. "The developers have healthy war chests due to swift sales, rising prices, and good pipelines in recent years," says S&P Global Ratings credit analyst , Esther Liu.

"Many players may now be lured into grabbing opportunities to increase their land banks amid growing opportunities, such as land tenders."
Liu said many developers were eyeing opportunities after several years of muted land replenishment and reduction in farmland conversions.
"Hence, we expect land prices to remain buoyant, even though mainland Chinese bidders reduced their appetite to about 17% of residential land purchases by value in the current fiscal year, from a peak of over 50% two years ago," she said.
The failed tender at Kai Tak and upcoming high-ticket tenders should also support land prices, offering further incentive to developers to buy, at the expense of their rating buffers."
In addition, S&P Global Ratings expects house prices om Hong Kong to rebound by 5% in 2019, after a 9% drop since August 2018.
Pressure from more interest rate hikes in Hong Kong has eased following the U.S. Fed's lightened position, S&P says, and, in addition, Hong Kong's monetary base, a key pillar supporting house prices, has bounced back.
"Transaction volume has already shown early signs of recovery, with strong underlying demand," S&P says.
"Moreover, supply is slowing for the first time since the Government pledged to keep annual supply above 20,000 units, meaning supply will not significantly ramp up for the next 12-18 months." 
The market for "nano" apartments (i.e. those under 400 square feet) is likely to see the most subdued growth, S&P believes.
"The sharper impact is due to the segment's high growth before the market correction, and potential buyers' particular sensitivity to rate hikes and other macro factors.
"We estimate 72% growth in loans offered by major developers to "nano" homebuyers, suggesting a growing risk level.
"However, the actual amount is still insignificant at this point. Developer loans and the Mortgage Insurance Programme have funded these flats with a high loan-to-value (LTV) ratio.
"This attracted a new homebuyer segment -- i.e., those that lacked down-payments or sufficient credit profiles to obtain traditional mortgages.
"Despite rampant growth, outstanding value comprised just 2.6% of total mortgage loans as of end-2017, and accounted for only a single-digit level of developers' total debt."
For commercial properties, S&P continues to believe that stable, recurring income will strongly support rated players.
"In our view, most rated office landlords shouldn't feel too much pain, despite decentralisation and increased supply, given that office rents from prime locations are largely unmoved.
"We expect decentralisation to have a stronger impact on developers this year, with sizable openings away from Central.
"In addition, demand is weakening from Chinese financial institutions.  While growth in visitor arrivals has shown a healthy rebound, it is not boosting retail sales.
"But local consumption and active tenant management should help rated retail landlords maintain their competitiveness and stability."  www.standardandpoors.com (ATI).